photo by Ariffin

Simply put, your investment risk tolerance is the amount of stress you experience when your account declines. In other words, how do you feel if your account declines five percent? How about 10 percent? What about 20 percent?

Risk Tolerance needs to be set at the right level for each individual investor to help avoid making costly mistakes. It can be difficult to determine a proper objective risk tolerance.

Below are excerpts from an article from the Wall Street Journal with key factors that should be taken into consideration when setting your risk tolerance level.

What You Should Know About Risk
by Daisy Maxey

The volatile ups and downs of the market this past year have led many investors to rethink their appetite for risk. It’s a crucial element in an overall investment plan, but many people likely don’t know where they stand these days.

Age Matters — to a Point

How can investors better gauge their risk tolerance? To do so, they should take a number of factors into account, including age, income, savings, retirement plans, state of health and stomach for volatility.

Obviously, younger people can take on more risk as they have more time for compounding — generating more earnings as existing earnings are reinvested and grow — to do its magic, and more time to make up for any losses.

Investors who are age 30 or 35 should be celebrating market declines, says Bill Schultheis, a principal at Soundmark Wealth Management in Kirkland, Wash. They’ve got the chance to buy shares cheaply and a long investing horizon during which those shares could appreciate in value.

But age isn’t the only factor. “It’s not just whether the person can take the risk or not; their situation should determine the level of risk,” says Tony Christensen, president of Louisville, Ky.-based Access Wealth Management.

If investors have a long time to invest and have built up decent savings, then they can afford to take a bit more risk. Even if they’re conservative, they should still invest. On the other hand, if they’re sending children to college next year, they should protect that money by investing conservatively, Mr. Christensen says.

Thinking Ahead

Your net worth also should be factored into the asset-allocation decision. An investor with $1 million sitting in a bank account who plans to invest another $100,000 can likely afford some roll-of-the-dice investments, depending on his or her lifestyle. But someone with just a 401(k) valued at $200,000 will want to take a more conservative route.

And investors with multiple goals may have multiple risk profiles. If you want to have enough for retirement, and also hope to one day be able to buy a boat or vacation home, for example, you could invest the money for retirement moderately to conservatively, but invest the boat money very aggressively, Mr. Tuttle says.

Since you can’t predict your lifespan, it’s best to take risk as though you’ll live a long life. That way, you’ll either end up with enough money to see you through retirement or leave your heirs a tidy sum.

And even if you plan to work after retirement, you should invest both conservatively and aggressively enough to ensure that your nest egg can carry you through without that post-retirement income. Plans to work can be stymied by a health issue or a layoff.

What Can You Bear to Lose?

One tactic that may help when considering how much risk you can stand is to give some thought to how steady your hand would be if you were to suffer a big loss at this point in your life.

Investors love risk when the market’s going up, but not when it’s going down, says Mr. Schultheis, and a lot of them have not come to grips with the fact that the stock market is really a risky short-term investment. One of the first things he tells his clients is, “The market will drop at least 30% to 35% in your lifetime; you need to be prepared for that.”

At Paragon Wealth Management, we created a short 10-question survey to help investors determine their risk tolerance. Click on this link to take the survey:  Investment Risk Tolerance Survey.

Visit Wall Street Journal online to read the entire article.

photo by pedrosimoes7

Are you worried about running out of money for retirement? This question has been on many investors minds the past year and a half. Below is an article from Motley Fool’s website. It gives a few useful tips of ways to prepare for a happy retirement.

Start Doing This or You’ll Retire Poor

By Dan Caplinger
August 24, 2009

Many investors would just as soon forget last year, and for good reason — the downturn ravaged 401(k) account balances. But the more important issue is whether workers are doing the right things in response to a terrible 2008.

Another look at 401(k) plans
Recently, 401(k) administrators have reported about what their participants have done with their money lately. After Fidelity released its quarterly report a couple of weeks ago, Vanguard followed suit last week with its look at 2008 data from its 3 million customers across 1,800 plan sponsors.

The report included a lot of good news. Here are some positive signs for workers:

• Muted losses. Even with the stock market down sharply, account balances for continuous 401(k) plan participants in 2008 fell less dramatically — about a 14% loss at the median, with a third of plan accounts actually staying flat or rising in value.
• Higher automatic enrollment. The number of plans offering automatic enrollment into quadrupled from 2006 levels, with most of those plans opting for some form of balanced investment option as their default rather than a money-market fund.
• Target-date fund popularity rising. About 70% of plan sponsors offered target-date funds in 2008, with more than a third of eligible participants using them.
• Active trading levels low. Only one out of every six participants traded in their 401(k) accounts in 2008.
• Participants got smarter. Most employees avoided risky practices like owning too much employer stock, taking 401(k) loans, and opting for cashing out rather than rollovers when they switched jobs.

But hold off before you count the 401(k) problem solved for good. Workers have a long way to go before they should feel safe about their plan accounts.

Not saving enough
Perhaps most revealing about the report was how little most people have in their 401(k) plans. Vanguard’s average balance was $56,000, while half of all participants had $17,400 or less in their accounts. Only 15% had account balances of $100,000 or more. Even with many young participants, those numbers aren’t encouraging.

Moreover, most people didn’t save a big percentage of their salary. More than half of participants saved 6% or less, while only a fifth set aside 10% or more of their earnings to their 401(k).

Making the wrong investments
In addition, 401(k) participants don’t always invest well. For instance, only small percentages of workers invested in small-cap or international funds. Those numbers don’t include the allocations to those assets in target funds, though, so the numbers aren’t quite as discouraging as they appear.

In contrast, what workers do buy is employer stock. More than half of those who can buy shares do so. And while a vast majority of them — 80% — have 20% or less of their 401(k) invested in it, numbers from outside Vanguard suggest the problem is much more serious at some companies. For instance, look at how much workers at these companies have in company stock:

Source: Brightscope.

Given how much workers already rely on their employers for their salary, pension, and benefits, putting a big slug of money into company stock leaves you dangerously reliant on your company’s survival. That’s a risk you probably shouldn’t take.

A fair snapshot?
Although 401(k) statistics are interesting, you should take them with a grain of salt. Many people make big investments outside their 401(k)s that can change things dramatically.

But you can still take a few lessons from the report:

• Take charge. Don’t just rely on your plan’s default choice. Look into your investment options and choose the ones that make sense for you.
• Save more. The thing you have the most control over with your retirement nest egg is how much you set aside from your paycheck. The more you can live without now, the more you’ll have later.
• Don’t panic. It appears that whether it was simple inertia or conscious choice, most participants stayed the course throughout last year’s panic. Stick with your long-term investing plan and you should also come out ahead in the long run.

Your 401(k) is one of the most valuable tools you have for retirement. Make the most of it, and you’ll get the results you want.

Visit Motley Fool’s website to read the article.

With longer life expectancies, rising healthcare costs and the demise of traditional pension plans, most people worry about having enough money to last through their retirements–and wonder whether they’ll be able to retire when the time is right. To avoid these concerns, you need a retirement plan that provides enough financial freedom to accomplish your post-retirement goals, whether that includes traveling, visiting family, volunteering in your community, or all of the above.

One of our most requested services at Paragon Wealth Management is our retirement planning services. We understand that each family’s situation is unique, and we offer a custom plan that is catered to your individual needs.

Below are excerpts from an article about planning for retirement and creating a retirement planning strategy.

Excerpts taken from BrookfieldNOW

Planning for retirement means far more than simply accumulating a nest egg for the years when you’re no longer working. It involves developing a long-term investment strategy that helps you address this critical goal without losing sight of your more immediate financial concerns, such as paying your mortgage or sending a child to college.

Where Will Your Retirement Nest Egg Come From? You will potentially need 70% to 80% (or even more) of your pre-retirement income to maintain your standard of living in your retirement years. Therefore, before you can formulate a cohesive retirement plan, you need to determine what your sources of income will be in retirement.

• Individual Retirement Accounts (“IRAs”). If you don’t have an IRA, you could be passing up a valuable opportunity to save for your retirement. Whether you choose a traditional IRA or a Roth IRA, the same basic tax-favored principle applies: savings in an IRA get the benefit of tax-deferred growth. As a result, an investment in an IRA allows you to potentially accumulate more assets than if you had invested the same dollars in a taxable account.

• Your Company Retirement Plan. Past generations relied on company pension plans to take care of their retirement needs. While many companies still maintain defined benefit plans, many have switched to or added defined contribution plans, such as 401(k) plans. With a 401(k) plan, the responsibility is on you to contribute to the plan and determine how your savings will be invested.

One key advantage of 401(k) plans is that they offer tax-deferred savings. That means that you do not pay taxes on your contributions or on the earnings accumulating in the plan until you make a withdrawal. Consider making the highest allowable contribution to your employer-sponsored retirement plan.

• Your Social Security Benefits. These days, Social Security represents only a small portion of the income most retirees will need. According to a study done by the Employee Benefit Research Institute, individuals 65-years-old or older whose post-retirement annual income was at least $50,000 would generally derive only 14.3%3 of their retirement income from Social Security.

The Responsibility to Plan Is Yours The majority of the income you’ll need in retirement will most likely come from you. That’s why it’s vital that you take the time now to develop an intelligent, practical retirement plan that can help you pursue your retirement income needs.

A good way to start is to participate to the fullest extent possible in a 401(k) plan (if your company provides one) and make annual contributions to an IRA. Both give your money the potential to grow on a tax-deferred basis.

The information in this article is based on sources believed to be reliable, but its accuracy cannot be guaranteed.

Visit BrookfieldNOW online to read the entire article

Excerpts taken from The News Herald online on Tuesday, August 18, 2009
Written by Shawn Bumgardner

photo by jameshannan

Has Wall Street hit rock bottom, and is the U.S. economy bound for recovery?

Some claim the worst is over, which is of small comfort to American investors, many of whom have seen their retirement portfolios quickly drop in value during the last 18 months.

Just as the stock market crash of 1929 and the Great Depression had a lasting impact on those who lived through it, our current recession could change the way Americans earn, save, invest and spend money. The question is how will we improve our individual and shared financial future?

We all make choices. The tanking economy has triggered all kinds of responses. Some investors have simply pulled the plug on their remaining investments. However, a mass exodus from the stock market will do more damage to the economy as a whole.

The other problem with this approach is that once you sell a stock, you forfeit any opportunity to regain the value you lost.

Some investors are paralyzed by fear and have not corrected or adjusted their financial position in the marketplace. While this is a common and natural response, it’s not necessarily in your best interest to stand still.

Whether you ultimately move or adjust your stocks, it’s important to take time to evaluate your investment positions and make changes as you see fit, all the while proceeding with due caution.

Buy low if you can bear the risk

This suggestion might seem counterintuitive, but if you are in a position to accept risk, right now is a great time to invest. The market is full of bargains, and there will be people who can profit from the market’s downfall.

As the old adage goes, buy low and sell high. But as recent history shows, investing involves risks — more than many of us bargained for — and there are no guarantees.

Consult with a financial advisor

Now more than ever, investors can benefit from the insights of an experienced financial advisor who can help you sort through your options.

As survivors of the recession, we can potentially work even harder, adjust our expectations and appreciate what we have.

Much of the success or failure of the stock market relies on something intangible — buyer confidence. If we can find our way back to confident investing, we could be on our way to a stronger economy.

Visit The News Herald online to read the entire article.